<PAGE> 1
CONFORMED COPY
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------- ----------------
Commission file number 1-9214
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Perkins Family Restaurants, L.P.
- -------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
Delaware 62-1283091
- -----------------------------------------------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
6075 Poplar Avenue, Suite 800, Memphis, Tennessee 38119-4709
- -----------------------------------------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(901) 766-6400
- -------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by X whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
1
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PERKINS FAMILY RESTAURANTS, L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -------------------
1998 1997 1998 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Food sales $72,798 $66,400 $203,980 $185,069
Franchise revenues 5,832 5,203 16,152 14,603
------- ------- -------- --------
Total Revenues 78,630 71,603 220,132 199,672
------- ------- -------- --------
COSTS AND EXPENSES:
Cost of sales:
Food cost 20,251 19,165 57,607 53,099
Labor and benefits 25,553 22,200 70,974 62,645
Operating expenses 14,282 13,033 40,366 37,081
General and administrative 7,514 6,763 21,463 19,593
Depreciation and amortization 5,138 3,979 14,947 11,898
Interest, net 3,690 1,127 10,891 3,558
Loss on/Provision for disposition of assets, net -- -- 295 --
Asset writedown (SFAS No. 121) -- -- 500 --
Tax related reorganization costs -- -- -- 650
Other, net (350) (245) (923) (622)
------- ------- -------- --------
Total Costs and Expenses 76,078 66,022 216,120 187,902
------- ------- -------- --------
NET INCOME $ 2,552 $ 5,581 $ 4,012 $ 11,770
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
PERKINS FAMILY RESTAURANTS, L.P.
BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
September 30,
1998 December 31,
(Unaudited) 1997
------------- ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,621 $ 14,160
Receivables, less allowance for
doubtful accounts of $766 and $846 8,143 7,719
Inventories, at the lower of first-
in, first-out cost or market 4,999 4,232
Prepaid expenses and other current assets 1,759 1,823
-------- --------
Total current assets 16,522 27,934
-------- --------
PROPERTY AND EQUIPMENT, at cost, net of
accumulated depreciation and amortization 131,775 127,392
NOTES RECEIVABLE, less allowance for
doubtful accounts of $207 and $6 1,517 983
INTANGIBLE AND OTHER ASSETS, net of
accumulated amortization of $29,820
and $27,591 55,514 58,015
-------- --------
$205,328 $214,324
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
<PAGE> 4
PERKINS FAMILY RESTAURANTS, L.P.
BALANCE SHEETS
(In Thousands, Except Unit Amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of capital lease obligations $ 1,219 $ 1,301
Accounts payable 12,239 10,563
Accrued expenses 20,964 35,948
-------- --------
Total current liabilities 34,422 47,812
-------- --------
CAPITAL LEASE OBLIGATIONS, less
current maturities 6,071 6,999
LONG-TERM DEBT 134,000 130,000
OTHER LIABILITIES 3,348 4,312
PARTNERS' CAPITAL:
General partner 275 252
Limited partners (5,463,924 Units issued and
outstanding) 27,212 24,949
-------- --------
Total partners' capital 27,487 25,201
-------- --------
$205,328 $214,324
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE> 5
PERKINS FAMILY RESTAURANTS, L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income $ 2,552 $ 5,581 $ 4,012 $ 11,770
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,138 3,979 14,947 11,898
Loss on/Provision for disposition of assets, net -- -- 295 --
Asset writedown (SFAS No. 121) -- -- 500 --
Other non-cash income and expense items 300 566 828 1,254
Changes in other operating assets and liabilities 2,611 3,979 370 977
-------- -------- -------- --------
Total adjustments 8,049 8,524 16,940 14,129
-------- -------- -------- --------
Net cash provided by operating activities 10,601 14,105 20,952 25,899
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for property and equipment (6,488) (4,893) (18,260) (10,314)
Proceeds from sale of property and equipment 8 -- 20 --
Investment in/Advances to joint venture -- (400) (110) (400)
Payments on notes receivable 218 88 427 889
-------- -------- -------- --------
Net cash used in investing activities (6,262) (5,205) (17,923) (9,825)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 2,000 4,750 31,550 34,100
Payments on long-term debt (5,500) (7,900) (27,550) (39,050
Principal payments under capital lease obligations (322) (391) (1,010) (1,379)
Deferred financing costs -- -- (536) --
Repurchase of limited partnership units (55) -- (16,296) --
Distributions to partners (1,295) (3,475) (1,726) (10,428)
-------- -------- -------- --------
Net cash used in financing activities (5,172) (7,016) (15,568) (16,757)
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents (833) 1,884 (12,539) (683)
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS:
Balance, beginning of period 2,454 170 14,160 2,737
-------- -------- -------- --------
Balance, end of period $ 1,621 $ 2,054 $ 1,621 $ 2,054
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
PERKINS FAMILY RESTAURANTS, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Basis of Presentation
The accompanying unaudited financial statements of Perkins Family Restaurants,
L.P. (the "Company") have been prepared in accordance with the instructions to
Form 10-Q and therefore do not include all information and notes necessary for
complete financial statements in conformity with generally accepted accounting
principles. The results for the periods indicated are unaudited but reflect all
adjustments (consisting only of normal recurring adjustments) which management
considers necessary for a fair presentation of the operating results. Results
of operations for the interim periods are not necessarily indicative of a full
year of operations. The notes to the financial statements contained in the
Company's 1997 Annual Report on Form 10-K should be read in conjunction with
these statements.
Certain prior year amounts have been reclassified to conform to current year
presentation.
Going Private Transaction
The Company is a limited partnership that currently is indirectly wholly-owned
(including its general partner's interest) by The Restaurant Company ("TRC").
Until December 1997, the Company's Units were traded on the New York Stock
Exchange under the symbol "PFR." On December 17, 1997, the Company, TRC and a
subsidiary of TRC completed a series of transactions pursuant to which the
Company's operating subsidiary was eliminated through a merger and the Company
became an indirect wholly-owned subsidiary of TRC and the approximately 5.44
million Units held by persons other than TRC and its subsidiaries were
converted into the right to receive $14.00 in cash per Unit (the "Going Private
Transaction"). There has not been, nor is there anticipated to be, a change in
the Company's management or business strategy as a result of the Going Private
Transaction.
The following unaudited pro forma results of operations for the third quarter
and nine months ended September 30, 1997 give effect to the Going Private
Transaction as if it had occurred on January 1, 1997. This pro forma
information does not necessarily represent what the results would have been had
the Going Private Transaction occurred at the beginning of the period
presented.
<TABLE>
<CAPTION>
(Unaudited)
--------------------------------------------
Three Months Nine Months
Ended Ended
September 30, 1997 September 30,1997
------------------ -----------------
<S> <C> <C>
Revenues $ 71,603 $ 199,672
Net Income $ 2,489 $ 2,398
</TABLE>
6
<PAGE> 7
Contingencies
The Company is a party to various legal proceedings in the ordinary course of
business. Management does not believe it is likely that these proceedings,
either individually or in the aggregate, will have a material adverse effect on
the Company's financial position or results of operations.
In the past, the Company has sponsored financing programs offered by certain
lending institutions to assist its franchisees in procuring funds for the
construction of new franchised restaurants and to purchase and install in-store
bakeries. The Company provides a limited guaranty of the funds borrowed. At
September 30, 1998, there were approximately $3,427,000 in borrowings
outstanding under these programs. The Company has guaranteed $1,142,000 of
these borrowings. No additional borrowings are available under these programs.
On February 26, 1998, the Company entered into a separate two year limited
guaranty of $1,200,000 in borrowings of a franchisee which were used to
construct a new franchise restaurant. As of September 30, 1998, the outstanding
balance on the loan was $1,200,000.
The Company's largest franchisee operates 35 restaurants, the majority of which
are leased from unaffiliated lessors, pursuant to a temporary license agreement
which expires November 30, 1998. In May 1998, the franchisee filed a petition
for reorganization under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the Western District of New York. The
Company and the franchisee have entered into a Stipulation and Order
Authorizing Standstill and Extension Agreement which has been approved by the
Bankruptcy Court authorizing the continuing temporary operation of the
franchisee's restaurants.
The franchisee has advised the Company that it has entered into an agreement in
principle with an operator of truck stops and travel plazas for the acquisition
of a majority of the franchisee's assets related to its Perkins Family
Restaurants. If approved by the Bankruptcy Court, the acquiror will become a
franchisee of the Company and provide funds for remodeling existing
restaurants. The Company has been informed that the acquiror intends to operate
29 to 33 restaurants. The balance of the franchisee's restaurants will be
closed. During the past three years, the franchisee's average net royalty
payments to the Company were approximately $1.8 million and at September 30,
1998, the franchisee was delinquent in its royalty obligations in the amount of
approximately $530,000 of which $300,000 had been reserved.
7
<PAGE> 8
Supplemental Cash Flow Information
The increase or decrease in cash and cash equivalents due to changes in
operating assets and liabilities for the three and nine months ended September
30, consisted of the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
(Increase) Decrease in:
<S> <C> <C> <C> <C>
Receivables $ (58) $(1,193) $ (736) $(2,158)
Inventories (352) 85 (767) 84
Prepaid expenses and
other current assets 108 192 (481) (473)
Other assets (126) (297) (206) (1,380)
Increase (Decrease) in:
Accounts payable 788 4,941 1,677 3,668
Accrued expenses 2,868 (94) 1,932 697
Other liabilities (617) 345 (1,049) 539
------- ------- ------- -------
$ 2,611 $ 3,979 $ 370 $ 977
======= ======= ======= =======
</TABLE>
The Company paid interest of $361,000 and $1,115,000 during the quarters ended
September 30, 1998 and 1997, respectively, and $7,249,000 and $3,646,000 for
the nine month periods then ended.
Asset Writedown (SFAS No. 121)
As required by Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of," the Company evaluates the recoverability of assets
(including intangibles) based upon their related undiscounted estimated future
cash flows when events and circumstances indicate that assets might be
impaired. During the first quarter of 1998, as a result of this review, the
Company identified five restaurant properties which were not expected to
generate undiscounted future cash flows sufficient to cover the carrying value
of the underlying assets related to these properties. As required under SFAS
No. 121, the carrying amounts of the assets associated with these restaurant
properties were written down to their estimated fair market values. The
resulting non-cash charge reduced first quarter 1998 income by $500,000.
8
<PAGE> 9
Income Taxes
The Company is a nontaxable partnership for state and Federal income tax
purposes. Under the Company's form of taxation, any distributions paid by the
Company are not taxable to its partners. Instead, the Company's taxable income,
which may vary substantially from income reported for financial purposes, is
included in the state and Federal income tax returns of its partners.
Accordingly, no provision for income taxes has been reflected in the
accompanying financial statements.
The Company will pay distributions to its partners from available cash flow in
amounts sufficient to satisfy any tax liabilities of the partners arising out
of the allocation of taxable income or gain from the Company.
New Accounting Pronouncements
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for fiscal years beginning after December 15, 1997
with restatement of all prior periods shown if not impracticable to do so. SFAS
No. 131 requires the disclosure of certain information about the operating
segments of the Company in the financial statements. The Company will implement
SFAS No. 131 during 1998; however, reporting of segment information in interim
financial statements is not required in th initial year of application.
In April 1998, The American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," which the Company is required to adopt in 1999, with earlier
application permitted. SOP 98-5 requires the costs of start-up activities to be
expensed as incurred. Upon adoption of SOP 98-5, the Company will be required
to record a cumulative effect of a change in accounting principle to write off
any unamortized preopening costs that exist on the balance sheet at that date.
As of September 30, 1998, the Company had unamortized preopening costs of
approximately $403,000.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998
RESULTS OF OPERATIONS
Overview:
The Company is a leading operator and franchisor of full-service mid-scale
restaurants located primarily in the Midwest, Pennsylvania, upstate New York,
and central Florida. As of September 30, 1998, the Company owned and operated
139 full-service restaurants and franchised 355 full-service restaurants. The
Company also manufactures and distributes bakery products which are sold to
Company-operated restaurants, franchisees, third-party bakers and food
distributors. The business of Perkins was founded in 1958, and since then
Perkins has continued to adapt its menus, product offerings, building designs
and decor to meet changing consumer preferences. Perkins is a highly recognized
brand in the geographic areas it serves.
The Company's revenues are derived primarily from the operation of full-service
restaurants, the sale of bakery products produced by its manufacturing
division, Foxtail Foods ("Foxtail"), and franchise fees. Foxtail offers cookie
dough, muffin batters, pancake mixes, pies and other food products to
Company-operated and franchised restaurants through food service distributors
in order to ensure consistency and availability of Perkins' proprietary
products to each unit in the system. Additionally, Foxtail manufactures certain
proprietary and non-proprietary products for sale to non-Perkins operations.
Sales to Company-operated restaurants are eliminated in the accompanying
statements of operations. In the nine months ended September 30, 1998, revenues
from Company-operated restaurants, Foxtail and franchise fees accounted for
84.1%, 8.6% and 7.3% of total revenues, respectively.
The Company's revenues have increased steadily over the last five years.
System-wide sales (including franchised restaurants) have increased 21.0% from
$587,755,000 in 1993 to $710,962,000 in 1997. Revenues from Company-operated
restaurants have increased 22.9% from $183,416,000 to $225,486,000 and
franchise revenues have increased 24.4% from $15,544,000 to $19,333,000, over
the same period. Average revenue per Company-operated restaurant has increased
13.8%, from $1,478,000 to $1,682,000 over the same period. Income before
extraordinary items has increased 22.2% from $12,602,000 in 1993 to $15,400,000
in 1997. Earnings before interest, taxes, depreciation, amortization, provision
for disposition of assets and extraordinary items for the same periods were
$31,695,000 and $36,291,000, representing a 14.5% increase. Company-operated
restaurants have achieved comparable restaurant sales increases in each of the
last twenty-eight quarters.
10
<PAGE> 11
A summary of the Company's results for the third quarter and nine months ended
September 30, are presented in the following table. All revenues, costs and
expenses are expressed as a percentage of total revenues. Certain prior year
amounts have been reclassified to conform to current year presentation.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Food sales 92.6% 92.7% 92.7% 92.7%
Franchise revenues 7.4 7.3 7.3 7.3
----- ----- ----- -----
Total Revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Costs and Expenses:
Cost of sales:
Food cost 25.8 26.8 26.2 26.6
Labor and benefits 32.5 31.0 32.2 31.4
Operating expenses 18.2 18.2 18.3 18.6
General and administrative 9.6 9.4 9.8 9.8
Depreciation and amortization 6.5 5.6 6.8 6.0
Interest, net 4.6 1.6 5.0 1.8
Loss on/Provision for disposition of assets 0.0 0.0 0.1 0.0
Asset writedown (SFAS No. 121) 0.0 0.0 0.2 0.0
Tax related reorganization costs 0.0 0.0 0.0 0.3
Other, net (0.4) (0.3) (0.4) (0.3)
----- ----- ----- -----
Total Costs and Expenses 96.8 92.3 98.2 94.2
----- ----- ----- -----
Net Income 3.2% 7.7% 1.8% 5.8%
===== ===== ===== =====
</TABLE>
Net income for the third quarter of 1998 was $2,552,000 versus net income of
$5,581,000 for the same period in 1997. For the nine months ended September 30,
1998, net income was $4,012,000 compared to $11,770,000 in the prior year.
Lower income is primarily the result of the effects in 1998 of additional
interest expense, depreciation and amortization related to the Going Private
Transaction.
11
<PAGE> 12
Revenues:
Total revenues for the third quarter and first nine months of 1998 increased
approximately 9.8% and 10.2% over the same periods last year due primarily to
higher comparable restaurant sales, increased Foxtail sales, and an increase in
the number of restaurants in the Perkins system. Same store comparable sales
for Company-operated restaurants increased approximately 7.2% and 8.4% over the
third quarter and first nine months of 1997, respectively, due primarily to an
increase in comparable guest visits, selective menu price increases and guest
trends toward higher-priced entrees. The shift in customer preference to
higher-priced entrees can be attributed to the Company's development and
promotion of higher-priced menu items. Three Company-operated restaurants
opening in 1997 after the second quarter and the opening of three new
Company-operated restaurants in the current year contributed to the increase in
restaurant food sales during the quarter and nine months ended September 30,
1998. These increases were partially offset by the refranchising of one
Company-operated restaurant during 1997. Management believes remodeling of
Company-operated restaurants, enhanced promotional events and implementation of
new products resulted in the increased customer counts.
Revenues from Foxtail increased approximately 9.1% and 13.1% over the three and
nine months ended September 30, 1997, and constituted approximately 8.6% of the
Company's revenues year-to-date. The increase in sales is primarily due to
growth in the number of stores in the Perkins system and increased external
sales.
Franchise revenues, which consist primarily of franchise royalties and sales
fees, increased 12.1% over the third quarter of 1997 and 10.6% over the first
nine months of 1997. This increase is due primarily to the opening of 31 new
franchised restaurants and the sale of one Company-operated restaurant to a
franchisee since September 30, 1997. This increase is partially offset by the
closing of nine underperforming franchised restaurants during the same period.
Costs and Expenses:
Food cost:
In terms of total revenues, food cost for the three months and nine months
ended September 30, 1998 decreased 1.0 percentage points and 0.4 percentage
points, respectively, over the same periods in 1997. Food costs decreased
during the current year primarily due to menu price increases effective in
January, May and August 1998. Lower commodity costs on pork, coffee and red
meat contributed to the decrease in food cost percentage as well. In addition,
Foxtail had lower commodity food costs and experienced a sales trend toward
higher gross margin products.
Labor and benefits:
Labor and benefits expense, as a percentage of total revenues, increased 1.5
and 0.8 percentage points for the third quarter and nine months ended September
30, 1998, respectively. Labor costs have increased over the prior year due to
higher minimum wage rates, a highly competitive labor market and slightly lower
productivity. Employee insurance costs rose over the prior year due to a change
in the provider network effective October 1, 1997. Many health care providers
within the network began to withdraw during the year depriving the Company of
anticipated discounts. Effective October 1, 1998, the Company changed provider
networks.
12
<PAGE> 13
The wage rates of the Company's hourly employees are impacted by Federal and
state minimum wage laws. Legislation enacted during 1996 which raised the
Federal minimum wage rate in 1996 and 1997 has had an impact on the Company's
labor costs. These increases have resulted in the Federal minimum wage rate
increasing from $4.25 per hour in 1996 to $5.15 per hour today. Certain states
do not allow tip credits for servers which results in higher payroll costs as
well as greater exposure to increases in minimum wage rates. In the past, the
Company has been able to offset increases in labor costs through selective menu
price increases and improvements in labor productivity. The Company anticipates
that it can offset the majority of the recent increases through selective menu
price increases. However, there is no assurance that future increases can be
mitigated through raising menu prices.
Operating expenses:
Operating expenses, expressed as a percentage of total revenues, equal the
third quarter of 1997 and decreased 0.3 percentage points from the nine months
ended September 30, 1997. For the quarter, a decrease in franchise service fees
was offset by higher new franchise store opening costs. The year-to-date
decrease is primarily due to lower utilities expense and lower franchise
service fees partially offset by increased franchise opening costs. Franchise
service fees decreased due to the termination of two service fee agreements
during 1997. Franchise opening costs increased due to the opening of 5
additional restaurants during the quarter and 15 additional restaurants
year-to-date compared to the same periods in 1997.
General and administrative:
General and administrative expenses increased 11.1% and 9.5% over the three and
nine months ended September 30, 1997. This increase is primarily due to higher
incentive compensation costs, restaurant development costs, field
administration costs, human resources costs and administrative costs at
Foxtail. In addition, payroll expense for corporate administrative staff has
increased over the prior year. These were planned increases deemed necessary as
the Company continues to increase the number of franchise and Company-operated
restaurants.
Depreciation and amortization:
Depreciation and amortization for the three and nine months ended September 30,
1998, increased approximately 29.2% and 25.6% over the same periods last year
due primarily to the write-up of fixed assets and intangibles resulting from
"push-down" accounting adjustments recorded in December 1997 in connection with
the Going Private Transaction. Additionally, the Company's continuing
refurbishment program to upgrade and maintain existing restaurants and the
addition of new Company-operated restaurants contributed to this increase.
Interest, net:
Interest expense for the three and nine months ended September 30, 1998,
increased 227.4% and 206.1%, respectively, over the same periods last year due
to debt incurred in December 1997 which was used to consummate the Going
Private Transaction. Interest expense associated with capital lease obligations
has decreased.
Other:
Results of operations for the nine months ended September 30, 1998, reflect a
$500,000 non-cash charge against earnings related to the writedown of certain
assets impaired under SFAS No. 121 recorded during the first quarter. In
addition, the Company recorded a net loss of $295,000 related to the
disposition of assets; this amount includes a loss of approximately $740,000 on
the disposal of two properties during the first quarter and the recognition of
a previously deferred gain of approximately $445,000 under SFAS No. 66,
"Accounting for Sales of Real Estate," related to the sale of property in 1994.
13
<PAGE> 14
YEAR 2000
The Year 2000 presents a critical business issue due to the possibility that
many computerized systems will not be able to process information including
dates beginning in the Year 2000. In recent years, the Company has upgraded
computer hardware and software in the normal course of business to Year 2000
compliant technology. The Company has established a plan to assess its
readiness for the Year 2000. A review of computer systems and software,
including non-information technology systems, has been substantially completed.
No material costs associated with achieving Year 2000 compliance internally are
anticipated based on this review.
The nature of the Company's business is such that the ability of outside
vendors to supply the Company's restaurants with food and related products and
preparedness of the Company's franchisees to appropriately assess and address
Year 2000 business risks represent the primary risks to the Company from third
parties. In response to these risks, questionnaires have been sent to all of
the Company's primary vendors to obtain reasonable assurances that adequate
plans are being developed to address the Year 2000 issue. The returned
questionnaires are being assessed by the Company, and are being categorized
based upon readiness for the Year 2000 issues and prioritized in order of
significance to the business of the Company. In the case of outside vendors
which provide inadequate assurance of their readiness to handle Year 2000
issues, appropriate contingency plans will be developed. The Company's
franchisees have been provided with information regarding the potential
business risks associated with the Year 2000 issue. The Year 2000 readiness of
significant franchisees will be assessed and action plans will be created to
address the identified risks.
Based on information currently available, management believes the most
reasonably likely worst case scenario related to Year 2000 compliance would not
have a material impact on its financial position or results of operations.
However, unanticipated failures by critical vendors or franchisees, as well as
unidentified internal failures, could result in a material adverse effect on
the Company's operations. As a result, management cannot reasonably predict
what impact, if any, Year 2000 issues will have on the Company.
CAPITAL RESOURCES AND LIQUIDITY
Principal uses of cash during the third quarter and first nine months ended
September 30, 1998, were capital expenditures, the purchase of public Units,
payment of Going Private Transaction expenses and tax distributions to
partners. Capital expenditures consisted primarily of costs related to land,
building and equipment for new Company-operated restaurants and remodels of
existing restaurants. Remodels and unit upgrades, new restaurant development
and equipment upgrades at Foxtail constituted approximately 83% of the capital
expenditures during the first nine months of 1998. The Company's primary
sources of funding were cash provided by operations, proceeds from the Notes
issued in December 1997 (see below) and revolving credit borrowings.
14
<PAGE> 15
The following table summarizes capital expenditures for each of the years in
the three-year period ended December 31, 1997 and the nine months ended
September 30, 1998 and 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- ------------------------
1997 1996 1995 1998 1997
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Maintenance $ 3,453 $ 2,987 $ 3,435 $ 2,590 $ 2,673
Renovation 2,790 4,064 8,431 2,785 2,486
New restaurant development 6,193 1,947 12,626 8,805 3,324
Manufacturing 714 651 859 980 328
Other 1,936 2,209 3,580 3,100 1,503
------- ------- ------- --------- ---------
Total Capital Expenditures $15,086 $11,858 $28,931 $ 18,260 $ 10,314
======= ======= ======= ========= =========
</TABLE>
The Company's capital budget for 1998 has been increased to $26.3 million from
$21.4 million. The primary source of funding for capital projects is expected
to be cash provided by operations and borrowings under the Company's revolving
credit facility.
During 1998, the Company has opened three new full-service Company-operated
restaurants and a Perkins Cafe Bakery, which is an embellishment of the core
concept with significant enhancements to menu, decor, service and exterior and
interior building design. The Company's capital budget was increased to cover
the cost of prototype development for the Perkins Cafe Bakery, purchasing
rather than leasing restaurant sites, acquisition of sites for 1999 development
and upgrading restaurant smallwares in all Company-operated restaurants.
A revised capital expenditures plan anticipates the opening of seven new
Company-operated restaurants in 1998 including the Perkins Cafe Bakery. Funds
not used to build new restaurants will be primarily applied to the acquisition
of restaurant sites to be developed in 1999, remodels of existing restaurants,
restaurant maintenance and upgrades at Foxtail.
On December 22, 1997, the Company issued $130,000,000 of 10.125% Unsecured
Senior Notes (the "Notes") due December 15, 2007. The proceeds were used to
repay outstanding senior notes and borrowings under the Company's revolving
line of credit, purchase Units from the public and pay expenses relative to the
Going Private Transaction.
On December 22, 1997, the Company obtained a secured $50,000,000 revolving line
of credit facility (the "Credit Facility") with a sublimit for up to $5,000,000
of letters of credit. The Credit Facility matures on January 1, 2003, at which
time all amounts become payable. All amounts under the Credit Facility bear
interest at floating rates based on the agent's base rate or Eurodollar rates
as defined in the agreement. As of September 30, 1998, $4,000,000 in borrowings
and approximately $1,790,000 of letters of credit were outstanding under the
Credit Facility.
15
<PAGE> 16
Prior to the fourth quarter of 1997, the Company had paid quarterly cash
distributions to Unitholders. Following the consummation of the Going Private
Transaction, the Company will pay distributions to its partners from available
cash flow in amounts sufficient to satisfy tax liabilities and other
obligations of the partners subject to the limitations of such distributions as
mandated in the Senior Note Indenture and the Credit Facility.
The Company's ability to make scheduled payments of principal of, or to pay the
interest or liquidated damages, if any, on, or to refinance, its indebtedness
(including the Notes), or to fund planned capital expenditures will depend on
its future performance, which, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors
that are beyond its control. Based upon the current level of operations,
management believes that cash flow from operations and available cash, together
with available borrowings under the Credit Facility, will be adequate to meet
the Company's liquidity needs for the foreseeable future. The Company may,
however, need to refinance all or a portion of the principal of the Notes on or
prior to maturity. There can be no assurance that the Company will generate
sufficient cash flow from operations, or that future borrowings will be
available under the Credit Facility in an amount sufficient to enable the
Company to service its indebtedness, including the Notes, or to fund its other
liquidity needs. In addition, there can be no assurance that the Company will
be able to effect any necessary refinancings on commercially reasonable terms
or at all.
SEASONALITY
Company revenues are subject to seasonal fluctuations. Customer traffic, and
consequently revenues, are highest in the summer months and lowest during the
winter months because of the high proportion of restaurants located in states
where inclement weather adversely affects guest visits.
FORWARD-LOOKING STATEMENTS
This discussion contains forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are based on current expectations that are subject to known and
unknown risks, uncertainties and other factors that could cause actual results
to differ materially from those contemplated by the forward-looking statements.
Such factors include, but are not limited to, the following: general economic
conditions, competitive factors, consumer taste and preferences and adverse
weather conditions. The Company does not undertake to publicly update or revise
the forward-looking statements even if the experience or future changes make it
clear that the projected results expressed or implied therein will not be
realized.
16
<PAGE> 17
PART II - OTHER INFORMATION
Item 5. Other Information
On October 19, 1998, Basil P. Livanos was elected to the Board of Directors of
Perkins Management Company, Inc., the general partner of Perkins Family
Restaurants, L.P., filling a vacancy created by the resignation in May, 1998 of
Charles L. Atwood.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Reference is made to the Index of Exhibits attached hereto
as page 18 and made a part hereof.
(b) Reports on Form 8-K - A report on Form 8-K was filed on October 2,
1998, documenting the resignation of Richard K. Arras as President and
Chief Operating Officer of Perkins Family Restaurants, L.P. on
September 22, 1998.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERKINS FAMILY RESTAURANTS, L.P.
BY: PERKINS MANAGEMENT COMPANY, INC.,
GENERAL PARTNER
DATE: November 10, 1998 BY: /s/ Steven R. McClellan
----------------- --------------------------
Steven R. McClellan
Executive Vice President,
Chief Financial Officer
BY: /s/ Michael P. Donahoe
--------------------------
Michael P. Donahoe
Vice President, Controller
Chief Accounting Officer
17
<PAGE> 18
<TABLE>
Exhibit Index
- -------------
Exhibit No. Description
----------- -----------
<S> <C>
27 Financial Data Schedule (for SEC use only)
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED
BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND FROM THE STATEMENT OF OPERATIONS FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS. (DOLLARS IN THOUSANDS)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,621
<SECURITIES> 0
<RECEIVABLES> 9,660
<ALLOWANCES> 973
<INVENTORY> 16,522
<CURRENT-ASSETS> 17,219
<PP&E> 246,755
<DEPRECIATION> 114,980
<TOTAL-ASSETS> 205,328
<CURRENT-LIABILITIES> 34,422
<BONDS> 140,061
0
0
<COMMON> 0
<OTHER-SE> 27,487
<TOTAL-LIABILITY-AND-EQUITY> 205,328
<SALES> 203,980
<TOTAL-REVENUES> 220,132
<CGS> 57,607
<TOTAL-COSTS> 168,947
<OTHER-EXPENSES> 47,173
<LOSS-PROVISION> 321<F1>
<INTEREST-EXPENSE> 10,891
<INCOME-PRETAX> 4,012
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,012
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,012
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>THE PROVISION FOR DOUBTFUL ACCOUNTS AND NOTES IS PRESENTED WITHIN OPERATING
EXPENSES IN THE ACCOMPANYING FINANCIAL STATEMENTS AND IS INCLUDED IN TOTAL COSTS
ABOVE.
</FN>
</TABLE>
